A company’s borrowings are often backed by securities, on the strength of which loans are given by the banks and financial institutions. The security is given for securing loans or debentures by way of mortgage on the assets of the company when the Charge is created. The Companies Act, 2013 covers the provisions relating to registration, modification, the satisfaction of Charges, consequences of failure in registration inclusive of delay in registration.
Why is Registration of Charge Vital Under the Companies Act?
The main purpose of registration of a Charge is to give notice to the Registrar of Companies (“RoC”) and to people who intend to advance money to the company about the encumbrance created on the assets of the company. The prospective lender may inspect the index of Charges and forms on the Ministry of Corporate Affairs portal.
What is a Charge?
“Section 2(16) of the Companies Act, 2013 defines “Charge” as an interest or lien created on the property or assets of a company or any of its undertakings or both as security and includes a mortgage.”
In simple terms, a Charge is a right created by a company i.e. “Borrower” in favour of a financial institution or a bank or any other lender, i.e. “creditor” who has agreed to extend financial assistance to the company on its assets or properties or any of its undertakings present and future.
Kinds of Charge
On the basis of the nature of the Charge, its kinds may be as follows:
- Fixed or specific Charge: A Charge is called fixed or specific when it is created to cover assets that are associated and definite or are capable of being ascertained and defined, at the time of creating the Charge e.g. land, building or plant, and machinery. A fixed Charge, therefore, is security in terms of a certain specific property and the company gives up its right to dispose of that property until the Charge is satisfied. In case of winding up/liquidation of the company, a specific Charge holder will be placed in the highest-ranking class of creditors.
- Floating Charge: A floating Charge is not attached to any definite property but covers property which is fluctuating type e.g. stock-in-trade. A floating Charge is on a class of assets in present and in future which in the ordinary course of business is changing from time to time and leaves the company free to deal with the property as it sees fit until the holders of Charge take steps to enforce their security. The crux of a floating Charge is that the security remains inactive until it is fixed or crystallised. The assets are mortgage in such a way that the mortgagor i.e. the company can deal with them without the concurrence of the mortgage.
On the basis of the conditions of the Charge, its kinds may be as follows:
- Pari-passu Charge: The expression Paripassu implies with an equal step, equally treated, at the same rate, or at par with. It is the Latin term which means “On equal Footing”. Under this, the Charge is shared by more than one lender in the ratio of their outstanding amount. The prior consent of the existing Charge holder is required by the company for creating Paripassu.
- Exclusive Charge: The exclusive Charge is provided to a particular lender only under the security provided. The creditor who is given credit facility security over the property on which the Charge is created has a right over the security above all other people.
- Further Charge: With the consent of the first Charge holder, a further Charge can be created on the security already provided for the first Charge. In case of winding up or liquidation, the first Charge holder has the right to recover his dues first and then the balance is recovered by the second Charge holder followed by other lenders
Registration of Charge
Section 77 to 87 of the Companies Act 2013 provides the procedure for the registration of Charges.
Every company, creating or modifying a Charge on its property, assets or undertakings, whether it is tangible or intangible situated within or outside India, shall register the particular of Charge with the Registrar within 30 days of such creation by applying Form No. CHG-1 (for other than debentures) and Form No. CHG-9 (for debentures).
Along with the Form CHG-1 or CHG-9 as the case may be, the documents such as a certified true copy of every instrument evidencing creation or modification of the Charge, particular of other Charge holders in case of joint Charge and consortium finance, and in case of acquisition of property which is already subject to Charge instrument evidencing such acquisitions, are filed.
Payment of fees can be made online in accordance with Annexure B of Companies (Registration offices and fees) Rules, 2014.
Extension of time for registration
If the particulars of the Charge is not registered with the Registrar within the prescribed period of 30 days then the extension of time may be sought by filing Form CHG-1 and supported by a declaration from the company signed by
its secretary or director that such belated filing shall not adversely affect the rights of any other intervening creditors of the company.
The application for extension shall be allowed in case of Charge created before the commencement of the Companies (Amendment) Ordinance 2019 within a period of 300 days and on or after the commencement of the Companies (Amendment) Ordinance 2019 within 60 days upon payment of additional fees as prescribed.
Further, if the Charge created is not registered within the condoned 300 days or 60 days then the Charge holder shall file Form No. CHG-8 with the central government for further condonation of delay of 300 days if the Charge was created before the commencement of the Companies (Amendment) Ordinance 2019 and 60 days if the Charge was created on or after the commencement of the Companies (Amendment) Ordinance 2019.
Certificate of registration of Charge or modification of Charge
Once the Charge is registered, Registrar will issue a certificate of registration of such Charge in Form No. CHG-2 and if the particulars of modification of Charge are registered with the Registrar, then the Registrar shall issue a certificate of modification of Charge in Form No. CHG-3.
Satisfaction of Charge
The company shall within the period of 30 days intimate the Registrar of companies through Form CHG-4 along with the fee as prescribed in Annexure B of Companies (Registration offices and fees) Rules, 2014. The Registrar shall enter the memorandum of satisfaction of Charge and issue the certificate of registration of satisfaction of Charge in Form No. CHG-5.
Further, the company shall incorporate the changes in the creation, modification or satisfaction of the Charges in the form no. CHG-7 in the Register of Charges maintained by the company.
Further, if the Charge satisfied is not registered within the condoned 300 days or 60 days then the Charge holder shall file Form No. CHG-8 with the central government for further condonation of delay of 300 days if the Charge was created before the commencement of the Companies (Amendment) Ordinance 2019 and 60 days if the Charge was created on or after the commencement of the Companies (Amendment) Ordinance 2019
Consequence of non-registration of Charge
Non-registration of the Charges with the Registrar of Companies shall not invalidate the Charge created but the same shall not be taken into account by the liquidator appointed under the Companies Act, 2013 or the Insolvency and Bankruptcy Code, 2016 on winding up of the company and the creditor. However, this does not prejudice any contract or obligation for the repayment of the money secured by the Charge.
Penalty for default
Section 86 of the Companies Act,2013 provides for the punishment and contraventions of Section 77. If the company defaults the provision, it shall be punishable with a fine, not less than one lakh rupees and which may extend to 10 lakh rupees. If the officer of the company is in default then he shall be punishable with imprisonment for a term which may extend to six months or with fine not less than twenty five thousand rupees which may extend to one lakh rupees or with both.